As was anticipated in our previous blog posting on 2 April 2012, clarification on certain aspects of the EU’s new short selling regulation relating to CDS on EU sovereign debt was published by ESMA on 20 April 2012. This final technical advice from ESMA to the European Commission on the new EU short selling rules provides guidance on various matters, including (a) when a person is deemed to have a net short position in EU sovereign debt, (b) when a CDS position is considered to be hedging against a default risk or the risk of decline of the value of the sovereign debt, (c) the method for calculating the level of an uncovered position in an EU sovereign debt CDS and (d) the initial and incremental notification and disclosure thresholds for the reporting of net short positions in EU sovereign debt. The initial thresholds will be:
- 0.1% where the total amount of the outstanding issued sovereign debt is Euros 500 billion or less, with incremental thresholds every 0.05% (i.e., at 0.15%, 0.20%, 0.25%, etc.); and
- 0.5% where the total amount of the outstanding issued sovereign debt is over Euros 500 billion (or where there is a liquid futures market for the particular sovereign debt), with incremental thresholds every 0.25% (i.e., at 0.75%, 1.00%, 1.25%, etc.)
The new rules come into effect across the EU on 1 November 2012.